[Part 2] Understanding Libra & Relavant Trends

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Understanding Libra & Relavant Trends

5. Evaluation & Effects

A. Positive side

▶ Libra will have the largest wide-use possibility compared to any other virtual currencies, as it solved the problems the virtual currencies currently have.*

* The price of Bitcoin has exceeded 10 thousand USD(as of 25th June 2019) due to the heightened expectancy in blockchain utilization as Libra releases its white book.

● It limits the price volatility* as a stable coin.

* Generally virtual currency is difficult to be used as a payment method due to its high price volatility.

● Facebook is a platform business of massive amount of subscribers*, and it may secure wide-use possibility as it constituted association with global corporations of various fields.

* Facebook 2.4 billion, Whatsapp 1.5 billion, and Instagram 1 billion

● Facebook announced the aggressive marketing strategy such as the support funds to its partner retailer shops.

 

B. Negative Side

▶ Details regarding Libra are still unknown. Especially its method of guarantying the value is unclear.

● Although it insists that it limits the price volatility, as it can be traded through the exchange markets, its intrinsic value may be apart* from the market price.

* In case of Tether, which insisted to fix its value as 1 USD per unit, has raised up to 1.32 USD(as of July 2018) due to speculations.

● Its issuance control mechanism is unclear, and the relation between Libra and the reserve is ambiguous ⇒ Inflation may occur for Libra, as the issuance of Libra increases

▶ There is a possibility epidemic personal information leak as Libra combines social data of the Facebook and financial data.

* Facebook has established its subsidiary, Calibra to separate its financial data.

▶ Although ICO is not planned at the moment, if the grand scale of ICO proceeds, the excessive fund concentration and too many trades through the exchange market may happen to lead it to become a speculative asset.

 

C. Effects on Financial System

▶ (Impeding Financial Stability) If all of the Facebook users(2.4 billion globally) transfer 1/10 of their bank deposits to Libra, the Libra reserve will exceed 20 trillion USD.

⇒ The solvency of the banks weakens, bank reserve decreases, and it will be a threat to emerging markets due to a possible capital outflow.

▶ (Intensify Financial Crisis) If there is any financialㆍcurrency crisis, there may be a sort of a bank run, and large amount of funds may be transferred from the legal tender to Libra, and it will intensify the crisis.

● The free exchange between Libra and the public currency may weaken the countermeasure ability in policy* with regard to the international capital movement.

* Especially, as Libra is able to transfer between trading individuals due to P2P, the existing supervision system may not be sufficient for the management and control.

● Libra may cause massive international capital movement, and expansion of exchange rate & asset price volatility in time of crisis, due to its exchangeability to any currencies.

▶ (Money Laundering) It is concerned to become a money laundering device on a large scale if it is not controlled by the banks.

* International investment banks such as Goldman Sachs and JP Morgan Chase has refused to participate in due to the uncertainty in terms of the regulation on Libra.

▶ (Monetary Policy) The effects of monetary policy may be limited because Libra can substitute the public currency issued by the central bank.

● On the other hand, there is an opinion that Libra may lead Central Bank Digital Currency by increasing the interests of digital payment.

▶ (Governance) There is a prediction that though it may be operated by the association initially, Facebook will wield the control eventually.

 

D. Effects on Bank Industry

▶ If Facebook purchases bonds and derivatives instead of depositing in a bank with the reserve, the balance sheets of banks will be shrunk.

▶ As Libra practically provides free overseas transfer service, the overseas transfer profit of banks will be impeded*.

* The overseas transfer amount as of 2018, Korea 1.4 billion KRW, Globally 62 billion KRW

▶ The possibility of excessive competition in the bank industry, when Facebook becomes a fully-fledged bank related to the launch of Libra.

* No plan to acquire banking license so far

● The vast amount of social data that Facebook has, already owns enormous potential in the loan sector.

 

E. Effects on Financial Consumers

▶ (Exchange Loss) If the public currency included in Libra reserve rises, the owner of Libra may suffer loss.

● Libra explained that their method is not the same method as Tether, which is fixed in 1:1 ratio to one public currency.

▶ (Excluded Financial Benefit) The traditional benefits such as interest profit and credit card benefit can’t be expected. Also, the customers will be excluded from deposit insurance subjects of the government.

● Although Libra insists that its service target is 1.7 billion of financially neglected class, it is criticized that it is practically impossible to purchaseㆍutilize Libra without a bank account.

▶ (Personal information leak) Considering the continuous personal information leakage* of Facebook so far, the same is concerned for Libra in financial data.

* British Cambridge Analytica(CA), has collected 87 million users of Facebook without permission(Nov. 2016)
* Private information of 50 million has leaked by a Hacking attack(Jul. 2017)
* 540 million cases of data such as IDㆍactivity history is defenselessly exposed in the cloud(Apr. 2019) etc.

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